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What Is the Difference Between Disposable Income and Discretionary Income?

What you do with your money counts.

In the flow chart of personal finances, disposable income is one step above discretionary income. Disposable income is all the after-tax money you have at your disposal to use (for spending or saving or investing or giving away). Discretionary income -- a subset of disposable income -- is the money you have left after paying for necessities. You can use your discretion in determining what to do with this money.

Knowing the amount of disposable and discretionary income you have is important as you plot your finances, both for the short and long term. The numbers are also important to the overall economy as personal consumption drives the U.S. economy and a rising amount of disposable or discretionary income bodes well for increased personal spending and thus a bolstered economy.

National significanceWhen the U.S. Department of Labor's Bureau of Labor Statistics puts together its Consumer Expenditure Survey -- which is used by economic policymakers, researchers, and others -- it takes into account money spent on food, housing, apparel, entertainment, healthcare, and other items (necessities and non-necessities). Information released in September 2015 showed that the average expenditures per "consumer unit," i.e., family, household, or financially independent single person, were $53,495 in 2014, a 4.7% increase from the previous year.

Meanwhile, the U.S. Department of Commerce's Bureau of Economic Analysis compiles data on personal income and expenditures and a metric called personal consumption expenditures (PCE), which it says "accounts for about two-thirds of domestic final spending, and thus ... is the primary engine that drives future economic growth." PCE includes both necessities and non-necessities and includes money spent by individuals, nonprofit institutions that primarily serve individuals, private noninsured welfare funds, and private trust funds.

Personal significanceIn your own life, it's important to manage the gap between disposable and discretionary income -- the money you spend on "necessities" -- and to put your discretionary income to use in a way that will benefit you in the long term. Food, shelter, transportation, and healthcare could all be considered necessities, but how much you spend on those will vary from person to person. Going out to eat in expensive restaurants five times a week is much different from buying food in bulk and preparing simple meals at home. Leasing a car is a much different economic proposition from buying one or relying on public transportation.

Each person will make those spending decisions for himself or herself and then decide what to do with the discretionary income left after providing "necessities." If you're planning for your future, saving and investing are two great options for some of this money. Saving won't get you a very big return on your money, but investing in stocks with money you won't need in the next few years could set you up for a more financially secure future, and investing is not just for people with lots of money already. As little as $50 a month can get you on your way. We've got a lot of basics to help get you started here.

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